Will the Eurozone Crisis Impact Mortgage Finance in 2012?

Posted on 30th December 2011

Sometimes somebody poses a question that is so complex that it’s nigh on impossible to answer – like how much would fresh instability in the middle east affect oil prices? Or whether the change of leader in North korea lead increase or decrease foreign direct investement in south korea? So as a landlord, you might just be thinking about the sovereign debt crisis in the eurozone and wondering whether it’s likely to affect your financing costs for next year.

Let’s face facts – your success as a landlord can depend just as much on finance costs than it does on buying the right properties, finding good tenants and all the other important factors. Low interest rates have resulted in lower mortgage for many landlords, but can we expect this to continue, and how would a crisis in the Eurozone affect this?

Scenario Planning

Following Cameron’s famous veto of the recently proposed tighter fiscal union, the eurozone leaders (in addition to the other countries wanting to pursue further integration) will now meet in March to discuss a solution to the crisis. Opinion is divided on whether or not the politicians will be successful, leading many to plan for alternate scenarios.

Indeed, with several eurozone countries having 10 year bond rates around the critical 7% mark, the fate of the eurozone (and of course, the euro) may not be in the leaders hands – some are already speculating that the pressures brought by these high borrowing costs could drive the euro to breaking point well before any deal to save the currency could be ratified.

Although others point out that the political capital invested in the euro, along with the will of germany to prevent a breakdown, will be enough to see the crisis resolved, the future is anything but certain.

Pressure on the Banks?

If the eurozone crisis did deepen (or, even worse, the euro collapsed entirely), the impact would likely be very bad for british banks. Disorderly soveriegn default could squeeze credit availability harder than in the peak of 2008 crisis, not to mention creating a potentially negative outlook for the housing market (which typically also makes mortgage lenders cautious).

A squeeze in credit availbility would once again push up rates as banks shore up their reserves with safe assets – landlords with deposits over 30%+ on their properties would likely be alright, but those who’ve extended their portfolio such that thier LTV falls below 20% may see soaring rates. This would presumably heavily affect the rising amount of “accidental landlords” – a phenomenon largely created by the banking crisis.

Not all opinion points at banks avoiding mortgages however – as many previously deemed safe investments become riskier, the limiting of options can actually improve the attractiveness of alternative investments. This happened recently with UK 10 year bonds, which now yields just over 2%. As the UK is outside of the eurozone, many banks may see UK mortgage debt as a relatively safe option in the medium term.

Staying Safe

It’s not just the credit availability of banks themselves that will determine mortgage rates next year – monetary policy in the UK could well shape this. Presently, most experts believe that the 0.5% rates will hold steady throughout next year, as the Bank of England look to battle low growth , but it’s hard to say that the situation would remain static in the event of a eurozone breakdown. Rising inflation caused by the criss, for instance, could force the bank’s hand to alter interest rates.

Even though current mortgage rates are well above the actual base rate – unlike before the crisis – a change in the base rate would undoubtedly cause mortgage rates to change, even if only moderately.

Ultimately, as stated at beginning of this post, these things are tricky to predict, and in the absense of expert financial knowledge or a crystal ball, it’s better to stay safe and guard yourself from rate fluctations – ensuring you have a healthly LTV ratio when refinancing is still likely to be the most effective fallback should rates be affected dramatically.

It’s worth remembering also, that any financial crisis tends to have an impact a great deal wider than just the cost of borrowing. Many forecasts for 2012 suggest that unemployment will continue to climb (potentially to around 2.85m) regardless of the eurozone crisis, making Landlord Insurance ever more important for landlords wishing to safeguard their income.